Tag Archives: Federal Reserve

[Exclusive: Situation worse than it was in 2007, says chairman of the OECD’s review committee]

By Ambrose Evans-Pritchard, in Davos

January 20, 2016 “Information Clearing House” – “The Telegraph ” – The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, a leading monetary theorist has warned.

“The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up,” said William White, the Swiss-based chairman of the OECD’s review committee and former chief economist of the Bank for International Settlements (BIS).

“Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he said.

“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something,” he told The Telegraph on the eve of the World Economic Forum in Davos.

With its recent miniscule 2% devaluation of the Yuan, media pundits noted that China had now also entered into the global currency war. What this comment implies is that other countries with the ability to issue or print their own currency, including the U.S., have been participating in a currency war by devaluing their own currency as a hoped for means to increase their country exports and thereby stimulate their economies. As China’s currency has been pegged to the USD, it had recently grown stronger as a byproduct of dollar’s recent dramatic strength. Accordingly, the peg that China used to tie-in to the dollar’s value had increased the Chinese yuan to a level that was hurting their exports. The resulting devaluation was China’s attempt to correct partially this unwelcome currency appreciation.

With FED’s past QE series of money printing, we have been at the forefront attempting to devalue our own currency as a means to improve our exports, reach the FED’s stated goal of increasing inflation which would produce higher GDP figures, allowing government officials to claim that economic growth or recovery is resuming. Not to be outdone, the European Central Bank has been purchasing weak credits from their banks, in order to make member bank financial solidity ratios appear stronger – which also requires substantially increasing its money supply. The largest and most outrageous example of intentional destruction in the value of its currency is Japan, which for nearly two decades has been on a mission to devalue its currency in order to stimulate inflation.

Currency expansion may seem like an ideal, benign solution to a country trying to stimulate its exports, but it does create a financial assault or loss to their trading partners. For example, China’s recent holding in excess of $1.3 trillion assets (until some recent sales of under $200 billion) from accumulated annual trade surpluses, would lose great value in its assets by the amount of such U.S. devaluation. If the U.S. were to expand its currency by 10%, China’s Treasury holdings could be reduced by $100 billion – not an insignificant amount. That is of course why the well known phrase “race to the bottom” stipulates that once one country starts to print currency, other countries, in order to protect themselves against the action of the initiator, have to follow and also devalue their own currency. We are currently witnesses to a race to the bottom in a continuing global currency war.

Definition of Currency War.

Wikipedia defines a currency war as “competitive devaluation where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a country’s currency falls so too does the price of exports. Imports to the country become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.”

It is arguable that currency wars are not only fairly current affairs, but that they last for relatively brief periods of time not extending beyond a few short years – as highlighted by our FED’s recent QE series. How might our understanding of currency war change if we were to expand slightly the definition of currency war, and by also taking a far longer view – that of going back to the founding of the FED? How would we appraise the big picture of government and FED policy over the years, and its now fully observable results on the populace?